The Australian equity market will see geopolitical volatility and more muted earnings growth as the main risks in 2017, according to Nikko Asset Management Australia.
This segment of the market had already started seeing a large rotation away from defensive and bond-sensitive stocks towards cyclical and value end stocks.
Additionally, equity market returns in Australia would be further driven by this rotation that first started in August last year.
According to Nikko AM’s head of Australian equities, Brad Potter, the correction should still have some way to go, given the extent of the bubble, and would be driven by rising global inflation.
The market would also see earnings growth in the more economically-sensitive sectors and stock picking may become more difficult due to the valuation dispersion between cheap and expensive stocks. On a positive note, yield spread between debt and equity would likely continue to drive mergers and acquisitions this year, both globally and in Australia.
“The current market PE appears relatively high, based on the average of the past 20 years of low inflation, but it has not moved over the last few months with the EPS upgrades, although it has been skewed by resources,” he said.
“Based purely on the combination of the market dividend yield of 4.5 per cent and EPS growth of high single digit, it is not unreasonable to expect a 12-15 per cent total return in the Australian share market in 2017.”
Potter also stressed that geopolitical risks would remain a “constant headache”, with the main focus of the market being new US President and the potential start of the Brexit process.
Also, Europe should be carefully monitored for political uncertainties in 2017, given the number of important elections, including France and Germany, he said.
